Eurozone Elections Spook Markets

LONDON -- Thanks to the Early May Bank Holiday, Britain has just enjoyed a three-day weekend, while the rest of Europe fretted about election outcomes from France and Greece, plus weak job-creation figures from across the Atlantic.

Austerite? Non, merci!In France, Nicolas Sarkozy lost the second round of voting in France's presidential election to his main rival, Francois Hollande, by 3.3% of the vote. As a result, the right-wing incumbent will step down on May 15 to be replaced by his Socialist rival.

During his campaign, Mr. Hollande declared his slogan to be, "My enemy is the world of finance," and promised to boost France's spending on social welfare. While campaigning, he vowed to introduce a 75% tax rate on those earning more than 1 million euros a year, hire 60,000 new teachers, and abandon austerity measures in favor of maintaining France's social model.

Beware of Greeks bearing votesMeanwhile, Greece -- birthplace of modern democracy -- also went to the polls on Sunday, this time in a general election. With the ruling PASOK-New Democracy coalition winning about a third of the vote, Greek voters failed to elect a majority government. With anti-austerity MPs winning the majority of votes, Greece faces more weeks of uncertainty as it attempts to form a government.

In another worrying development, Golden Dawn -- Greece's first far-right party for nearly four decades -- took around 7% of the vote. This anti-immigration, ultra-nationalist party promises to expel all legal and illegal immigrants. Its leading supporters wear black shirts and sport a Swastika-like symbol. Sound familiar at all?

These echoes of pre-war Nazi Germany, plus the uncertain election result, sparked a slide in the Greek stock market. On Monday, the ASE -- Greece's major stock market index -- nose-dived by 6.6% as investors rushed to dump Greek stocks at any price.

Mr. Market worriesInitially, this news from France and Germany caused a widespread slide in share prices across Europe, with stocks falling by up to 3% in major European markets. However, markets then recovered most of this ground to finish only slightly down on the day.

In Paris, the CAC 40 index actually rose by nearly 1.7% yesterday, having fallen to just above 3,100 at the opening. However, it is showing further weakness today and has slid 1.8% as I write. In Germany, the main Xetra DAX index rose fractionally on Monday but has dipped nearly 1% as I write today.

German politicians have already started fretting about the French and Greek elections. In particular, they worry about Hollande's plan to tear up the eurozone "fiscal compact" on budget discipline in a spending spree aimed at winning over the French electorate.

Also on Monday, the euro dropped to a three-month low, and the price of oil also dropped.

Meanwhile, across the Atlantic...This week's jittery start followed steep falls in share prices last Friday, when the U.S. Department of Labor revealed that America had added just 115,000 jobs in April, far fewer than expected.

Despite the U.S. unemployment rate falling slightly to 8.1% -- from 8.2% in March -- world markets reacted badly to this news. Indeed, the blue-chip FTSE 100 (INDEX: ^FTSE) index of elite British companies tumbled by nearly 2%, with U.S. markets having their worst week this year.

The summer of slumpsPersonally, all these echoes of the dark days of the '30s are making me very nervous.

With Greece a total basket case, Spain deep in the dung, and Germany fed up with bailing out its partners, I fear for the future of the single currency. Portugal is a complete mess and needs a second bailout, as its 10-year bonds yield an unaffordable 11.3% a year.

As I warned in April, I suspect that the next few months will bring a summer of slumps as investors finally grasp that Europe's solvency problems can't be cured with liquidity injections.

Indeed, history suggests that recessions accompanied by banking collapses take at least a decade to work out. Hence, we may not be even halfway through capitalism's current crisis!

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